As recently as three years ago, I was a huge fan of tax refunds. Despite the arguments against them, I liked getting a tax refund because it was the only way I’d found to save. I’m able to save on my own now, so I no longer aim to get a tax refund every year, but I certainly don’t fault anyone else for doing so. If that’s what you need to save, then do it!

I Bonds are savings bonds that are indexed for inflation. The earnings rate on an I Bond has two components:

The first is a fixed rate that remains the same for the life of the bond. (It’s currently 0.30%.)

The second is the variable “semi-annual inflation” rate. Twice each year (on May 1st and November 1st), this rate adjusts based on the current inflation rate. At the moment, it’s 1.52%.

The fixed rate and the variable rate are combined to get a composite rate, which is currently 3.36%. I know this is a lot of gibberish. All you really need to know is that I Bonds are a safe place to put your money so you don’t have to worry about it losing value to inflation.

Because of this, I Bonds are an attractive alternative to high-yield savings accounts, especially now. They offer higher rates of return, and I Bonds are state and local income-tax exempt. (Federal income tax on I Bonds can be deferred until the bonds are cashed in or stop earning interest after 30 years.)

One drawback? I Bonds aren’t as liquid as a savings account. You can cash them out whenever you want, but if you do so before five years, the bond is subject to a 3-month earnings penalty. (This is sort of like breaking a certificate of deposit early.)

I bonds cannot be cashed out “whenever you want.” There’s no liquidity within the first year.

Treasury Direct says
“* You can redeem your I Bonds when the bonds are 12-months-old.
* You will receive the purchase price of the bond plus any accrued interest.
* If you redeem an I Bond before it is 5-years-old, you will lose 3 months of accrued interest.
* If you’ve been affected by a disaster, special provisions may apply.”

@Anthony, also it’s cheaper to reinstate this program than to raise interest rates.

I loved I-bonds when they were offering 3%+ interest over inflation. I-bonds with only 0.3% interest over inflation only look good now because everything else is so bad.

Think of them as five-year CDs that you don’t have to give up after five years (I think you keep earning interest for 30 years).

One good thing about these is they help protect you from yourself if you are really trying not to spend the money and won’t need it for at least a year. Another good thing is that when you get the paper bonds (which you don’t when you buy them online), it’s kind of fun to get a stack of these to thumb through and it helps you feel rich, which can be motivating.

Note: the government’s site at Treasury Direct explains things very well.

I’m fairly sure they reinstated them because the policy wonks who have access to the government these days are all over Behavioral Economics and “Libertarian Paternalism” as Thaler and Sunstein put it in their book _Nudge_. (Great read, btw.) Reinstating the tax return savings bonds is a direct policy recommendation from that literature.

I-bonds are not being “reinstated” since they have been available for many years, at least electronically. What has changed in the past year or so is that each taxpayer is limited to buying only $5,000 of I-bonds per year. That I cannot understand. Why wouldn’t the government let its own citizens loan as much money to the government (which is what an I-bond does) as s/he wants?

Incidentally, the rate can, and did, go down to zero in the previous six-month period. It is now at 3.36% if you buy an I-bond now. Depending on when you buy your bond, you could get a higher or lower rate when it changes every six months, depending on what your “fixed rate” is.

First of all, I am really against anyone getting a refund -why give the government an interest free loan?
But I understand that messing with your withholding rates can be complex. Before you jump on the bandwagon, make sure that these ibonds are right for you and don’t go to a broker since they charge a fee to purchase the bond for you when you can get them directly from the government for free.
Fern Alix LaRocca CFP®

I just read up on these I-Bonds and I’m impressed. If I didn’t have a liquid savings account earning 2% I would definitely be buying some of these products. The way they calculate these rates make these products a very attractive option.

If the US was a company, would you feel that buying their stocks was a good investment? I wouldn’t. I would rather invest in private bonds or stocks from companies that have proven to be financially intelligent.

While I know it isn’t the technically smartest choice, I do over-withhold on my taxes. My refunds are actually quite substantial, and I always use them for something significant… one year they paid off my student loans, and another year they helped me pay cash for a good nused car. I know I’m not going to winnow away the money liek I would if I’d received it in small increments throughout the year.

It’s definitely a push to use “Behavioral Economics” in the tax code, as Nicole mentioned – which I think is a good thing. During tax time, tax preparers can start asking “how” people would like to save their money, instead of “if” they would like to save. It’s an interesting mental shift in the refund and has big implications anyone who may not have the best savings habits.

@10 Lois– I-Bonds aren’t being reinstated, but the ability to get your tax refund as a savings bond so that you never actually touch the money before it turns into a commitment device for saving has been reinstated. It’s one of those things that shouldn’t matter to the rational person, but most people aren’t rational (in the homo economicus sense). If people were rational they wouldn’t be getting much if any tax refund.

We just decided last month to buy I-bonds this year. We’re expecting a refund thanks to a huge amount of dental expenses we incurred last year, but we’re planning to wait until later in the year to buy our I-bonds electronically via the treasury. We’ll put our refund towards our HSA instead, but the I-bonds option is a great way to guarantee that your refund goes into savings – especially if a person might otherwise be tempted to spend it.

I can’t believe anyone would even think of investing in these.
I have cashed out all of my bonds and would never even consider ever buying one again.
They are a trap.
You’ve got to stop and think rationally for a minute. Despite what it might say on paper, given the current conditions of our country/economy, should you ‘purchase’ one of these bonds, there is NO guarantee you will ever see your money again.
Despite all the propaganda to the contrary, our government has traded what was once a firm foundation for one made of sand, quicksand.
And to think they are tempting you with something as pathetic as .30%.
WAKE UP!
Look, it’s a piece of cheese! I wonder what would happen if I went over and nibbled on it…WHACK!
Personally, I find it rather embarassing that something so foolish could be receiving such acceptance on a personal finance site!
I realize many people lack discipline and self control, but if you’re looking for safety and an inflation hedge, there is nothing better than precious metals safely stored outside of the reach of the pocket-pickers we call politicians.
Paper is paper. Gold is gold.
I have nothing to gain from writing this. You have everything to lose.

Buying into government issued Bonds right now seems like a pretty good idea. Certainly not a bad idea. You are only locked in for a year. So if something better comes along and you want to cash out then, you only take a two month interest penalty. With the penalty, that still comes out to about 2.5 percent interest, which in todays economy is better then most CDs.

Government bonds are certainly safer then Bonds from private companies. Can anyone say GM or Chrysler. People giving bond money to those companies lost just about everything.

I agree with Beaconlight Paper is only worth what we say it is! Gold and other precious metals have been valued and will be valued all over the world forever! If inflation go’s up as high as they predict it will…

I would rather have Gold in my home/safe rather than any dollar bill! I have worked for the Government for some time now and there a lot of things the common United States people don’t see! There is always an agenda with the Government and they always get something out of what they do for the “people” !

What you should do is take your tax refund and buy GOLD with it! Then you will have a real investment!

Investing in goverment bonds doesn’t make any sense to me at all. After all, who pays the interest on the bonds? The taxpayers. One of which is YOU. So in essense, you are paying YOUR OWN INTEREST! Why not just pretend you have a 401k loan with it and pay your self interest, bypass the middleman.

The government is not providing a favor by doing this. They are in desperate need for money.

Last week’s auction for 10 and 30 years bonds was almost a busted auction, meaning they almost didn’t have enough bidders. The only saving grace was from direct bidders, which is believed to be the Federal Reserve. So the Fed had to print money to give it to the Treasury.

Most Americans know that the deficit this year will increase about $1.5 Trillion. However, most don’t know that the government needs to borrow another $2 Trillion in order to pay back the principal from maturing bonds. That is roughly 22% of our GDP.

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